Tedium - Phar Too Ambitious 💊

Today in Tedium: As the place that people have generally been going for their COVID-19 vaccines, major pharmacy chains are playing an outsize role in the way that we receive the vaccine. (Though it would be nice if more people were getting it! Hinthint.) From a business standpoint, pharmacies have a vested interest in making the vaccination process as effective as possible—because if they do it right, people will remember that and come back for both their prescriptions and just about everything else. That’s great, obviously, but what would happen if you created a pharmacy that was basically “just about everything else,” where the drug store part was kind of an afterthought and you were just selling a bunch of crazy stuff to customers? That, my friends, is how you get Phar-Mor, the craziest retail pharmacy chain of all time. Today’s Tedium is about how Phar-Mor fell apart. — Ernie @ Tedium

Today’s Tedium is sponsored by Intent. More from them below. ⤵️

How Phar-Mor’s “deep discount” model worked, and why it scared Sam Walton

So if you grew up in the Midwest in the late 1980s and early 1990s like I did, you might remember Phar-Mor. You might remember that it was a fairly awesome retailer, the kind of place that seemed to have unbelievable deals.

And you might remember, like I did, that it closed fairly suddenly, despite being your favorite store.

Let’s take a step back to understand how the chain got to this unusual place of massive success, and why it suddenly failed. And at the root of understanding Phar-Mor is to put it in the context of the city that berthed it. See, Youngstown is a traditional steel town, and at the time Phar-Mor was founded, the steel had just exited in a major way. Between 1979 and 1980, U.S. Steel had basically left the city, a direct cost of about 5,000 jobs and a likely indirect cost that was far larger.

The evidence of that cost is obvious from its dramatic population decline: At the time, Youngstown had a population of about 115,000 people; the population is now down to about 65,000.

At the time Phar-Mor came around, Youngstown needed a hit. And Phar-Mor, at least at first, delivered in a big way, with the chain providing a city on its back lots of jobs.

Power buying saves. (Mike Kalasnik/Flickr)

The secret to what Phar-Mor did is not unlike what many other discount chains do today. It bought a bunch of stuff at bulk prices, sold it at its many stores, and passed the discounts to consumers. This is not unlike how stores like Sam’s Club or Costco do things, but Phar-Mor had a secret weapon: Mickey Monus, who was known as a legendary negotiator.

The company had come across a strategy it called “power buying,” in which it negotiated hard for goods, and passed the savings onto consumers. It would make deals with big companies to sell their products exclusively—and cut out their primary competitors in the process. And that meant you could get Coke cans, for example, for absurdly cheap prices compared to a nearby grocery store—with not a Pepsi in sight.

Remember how I said Phar-Mor caught Sam Walton’s attention? Here is the context of that line, discovered (after some digging) from a 1991 Wall Street Journal article:

Founded nine years ago in Youngstown, Ohio, Phar-Mor Inc. is making waves in the retail trade as it charges across the country. The privately held company didn’t invent the deep-discount strategy, but no one has pursued it more tenaciously. According to a retail analyst, WalMart Stores Inc. founder Sam Walton told him, “Phar-Mor is my toughest competitor.” (Wal-Mart declines to comment on the remark.)

Phar-Mor has developed a reputation for innovative merchandising, relentless marketing and bare-knuckle negotiating with suppliers. It has helped squeeze out mom and pop pharmacies and forced supermarkets and drugstore chains, unable to compete on price, to improve service. Investment bankers, meanwhile, are begging to bring the upstart company public. Phar-Mor officials say there are no plans to take that step.

That comment from Walton was a (Youngstown) vindicator for Phar-Mor, a chain that seemed to be less interested in being a pharmacy than being the next Walmart.

There was something about Phar-Mor that was weird and interesting, which is probably why as an adult I remember it so well. Yes, it was basically a discount retailer, but its quirks stood out. It seemed to be the big-box version of a convenience store—think Aldi or Lidl in pharmacy form, and you’re kind of on the right track—with all the oddness that description implies. Those stores primarily sell groceries, but have a section where they basically sell anything; Phar-Mor seemed to take the pharmacy as a suggestion, rather than a rule.

For example: Despite being a drug store (granted, a big-box one), it also rented videos, which was not common for a pharmacy to do at the time. The video rentals were extremely cheap, to the point where, despite being across town, it was more cost-effective to rent a bunch of tapes from Phar-Mor and make the trek back a few days later rather than to go to the Blockbuster or local video store around the corner. On top of that, it had a really interesting selection of video game rentals—unlike Blockbuster, Phar-Mor rented unlicensed NES games from makers like Tengen and Codemasters, which meant that Phar-Mor is responsible for introducing me to the egg-shaped hero Dizzy. Which means that Phar-Mor’s video store is forever on my awesome list.

But it would not last, and the reason it did not last is what makes this tale so interesting.

The media guide for the Youngstown Pride, the team Mickey Monus owned. (via Fun While it Lasted)

Basketball, betting, and cooked books: Why Phar-Mor’s luck eventually ran out

Before 1992, Mickey Monus was a hero to Youngstown. Through a combination of hard-charging dealing with suppliers and a willingness to make Youngstown great again, Monus became something of a hero to the local community. While Shapira was technically the CEO of the company, Monus was running things day-to-day, and he represented the face of this growing firm with an emerging national profile.

“He was a nationally known entrepreneur who brought recognition to a city associated mostly with closed steel mills and Mafia wars,” the Chicago Tribune wrote of him in 1992. “Town fathers lauded him for contributing generously to civic and charitable causes and for breathing life into a dying downtown by headquartering Phar-Mor in a deserted department store.”

You’ll note the Tribune story wrote of him in past tense. And it was not because he died. It was much worse.

See, Monus, in his efforts to take on Walmart with an aggressive game of ever-lower prices, encouraged his financial team to make a bit of a fib about the company’s financial reports, with the assumption the fib would eventually be fixed. Essentially, the fib started with those unnaturally low prices that had gotten Sam Walton’s attention: In its efforts to undercut Walmart, the company’s early profits eventually turned into losses, and rather than changing course, the company hid the financial details from its leadership.

“You knew you were doing something wrong, but you never understood how wrong,” said Pat Finn, the company’s chief financial officer and one of the few people who knew of the debt, in a 1994 interview with the PBS show Frontline. “I think he helped me believe that, you know, starting it for him, I was being a team ball player. Give him time and he’ll fix the problem.”

The problem was, the problem simply got bigger, in part because of team ball play: See, Monus was a sports fan and had used his Phar-Mor notoriety to launch a professional basketball league, the World Basketball League, with one of the primary teams playing in Youngstown. The league had a gimmick where none of its players were above 6 feet, 5 inches in height, but for some reason it did not use Randy Newman’s “Short People” as its official song.

Mickey Monus. (via Trip to the Mall)

And Monus’ ambition kept getting bigger, too: The Frontline documentary highlighted Monus’ tendency to hit up Vegas and spend money he didn’t have on himself and his wife. And at the time the fraud was exposed in 1992, he was part of a team that was attempting to put together a Major League Baseball team. (That team became the Colorado Rockies.)

But Monus’ glamorous lifestyle wasn’t the only problem: The efforts to hide the fraud allowed outside firms to make large investments in the company, which only worsened the problem. The investments ended up paying suppliers that hadn’t been getting paid, rather than improving the company, and because the board thought the company was growing like gangbusters, it kept expanding when it really wasn’t in a position to do so.

In the end, the company was reporting billions of dollars in annual sales at a time it couldn’t even pay its suppliers—leading to, at times, empty shelves.

While the fraud was hard to hide, it was ultimately Monus’ extracurricular activities that did the scheme in. His efforts to prop up a failing basketball league eventually played a key part in exposing the fraud after a $75,000 payment for travel expenses for the league had landed in the hands of an investor with Phar-Mor. Monus embezzled $10 million for the league; the company itself had effectively made up about half a billion dollars in assets by the time the scheme was exposed.

It happened so quickly that massive stores that were being constructed were forced to stop construction halfway through.

Finn, who cooperated with authorities, was sentenced to 33 months in prison for his role in the fraud; Monus received a 19-and-a-half-year sentence and served a decade of that.

Surprisingly, all that didn’t end up killing Phar-Mor. But it certainly didn’t give the company a strong leg to stand on.